#252 – How to Prepare for Lower Interest Rates

Hey, money bosses, welcome back to the money boss parent podcast, today, we're diving into the important topic that is going to have a big impact on our finances. And I'm sure a lot of you are reading the news and hearing all the conversations about potentially us getting lower interest rates. So Federal Reserve is scheduled to meet in mid September, and they have been talking about cutting rates. And so I want to talk about what these changes actually mean for us in a couple of different areas. Number one, our savings. We have really tremendously benefited from having high yield savings accounts, CDs that paid us more. So these things are going to start to shift. Second is our debt on the other side, the debt that we've carried for the last few years, the mortgages, car loans, credit card debts, have actually cost us more. So what changes are going to happen there? And of course, our investment portfolios, because all these things come together, have impact on our overall finances. So let's talk about all of these different areas, and I'll give you some suggestions of what steps you can take now to start getting ready. Also want you to understand that these things will take time to settle in. Just because they're going to announce that they're cutting rate by a certain percentage point isn't going to happen overnight, so we just need to be prepared to address these things one at a time. So my number one focus area would be to look at our savings. And the savings are usually focused on the short term financial goals. So a couple of areas here would be number one, our emergency reserves. Now I always mentioned this already. We had already been spoiled by having savings rates be higher for us in like savings accounts, not your traditional bank, but if you had a high yield savings account, hopefully you were earning over 5% return per year. Now, just a reminder that savings accounts that are designated as emergency funds should probably have three to six to nine months worth of your expenses in reserves for emergencies in order to help you transition you know life situations that that arise. So if you have a sum of money or you still working towards accumulating that emergency reserve. Now is the good time for you to start to evaluate now, if you haven't moved, and believe me, I have clients who haven't moved their emergency reserves funds, or there's just plain savings accounts to a high yield savings account, this might be a good time to explore that I also want you to think about, now that the rates are going to change, we already know that. You know, do you have enough in that account, and where might you be putting it in? So I want you to evaluate your need for the emergency reserves. Now the second layer in our short term bucket would be to think about, Is there time right now? Or do you have goals for which you might not need to use funds in more than a year, maybe one to two years, or like given to three years, but you still kind of want to keep those funds liquid? This is where we could explore locking in a higher yield paying assets such as CDs. CDs stand for certificate of deposit. So can we have CDs that represent those allocated funds for you? Right now would be a really good time to look at what rates are available. So scanning bankrate.com this is the site that I use frequently to look up different rates. And so currently, and again, market already knows this has been already priced into all of these yields you're seeing today, and once the rates start to change, what you can actually get in the market. So right now, a one year term CD ranges somewhere between 4.7% to like 5.5 point 1% for even shorter, like a 10 month CD. So you're probably safe to see like a 4.75% annual yield on the CD. Now, when the rates do change, these percentages will go down. But how it works with CDs is that you actually locking in that rate, so you probably won't be able to get a longer term CD with that kind of rate. However, if you sort of do a stack or ladder, that might still be a very advantageous strategy, and of. Course, one of the things to think about here is look around and evaluate all of the cash that you currently have on hand, whether it's cash in the savings accounts, in your checking accounts, or it's the cash in your investment account, in your retirement account and so forth. Because if you have cash sitting in those accounts. You really need to think about, should it be still sitting in cash, right? Or maybe it's even the money market. By the way, money markets that we have as placeholders in our investment accounts, in our retirement accounts, for one case, IRAs Roth, IRAs also paying you a percentage every year, and I will be tied into these changes that are happening in the market. So I want you to evaluate and see how these things are allocated. So a little bit of a cleanup of where all the cash is located. But the big takeaway here and then action steps for you to make sure that you are still earning the highest return for your cash. I've been saying that for the last few years, but now things are starting to shift and to to that point, it isn't going to be that drastic. Just because they're going to cut interest rate by point 5% that's not going to impact these numbers that much, but they're going to be slightly lower than what we used to have. Okay, I want to shift gears here and address the debt part. Here, we have tremendously benefited from higher interest rates on our savings accounts, and that's been great, but our debt has actually paid and suffered right, a bit more so if you're looking at this as a whole, and maybe I could sidetrack back to the beginning of this conversation. A good place for you to to have all of this information on would be a financial statement. So if you've never created a financial statement, take out a sheet of paper and divide it into two columns and write on in one on one side, on the left hand side, and list all of your assets, all of the things that I just mentioned, cash accounts, investment accounts, real estate, you know, businesses, whatever you have. And on the other side, list all of your liabilities, and that's the section that we're talking about. And then if you subtract debts from from your assets, that's how you figure out your net worth. We're not focusing on the net worth right now. We're focusing on looking at these different parts of your financial statement to help you evaluate and make the best of what is coming for us is investors in the personal finance area. So take a look at what your debts are if you recently bought bought a property. Right? This is probably going to be the busiest time for all the lenders, mortgage lenders out there, in terms of refinancing. So looking at what kind of debt you have, how much is it costing you in annual percentages? So and if you identify that, then we need to put priority on the highest interest debt first. A lot of times, it isn't just your mortgage, but also looking at your consumer debt. How about your credit cards? What kind of rates are you paying on your credit cards? It is astonishing to me, and I look at it every month too, by the way, when I pay off the credit card bill, I just, I'm just curious. I look at the statement, scroll all the way down, and you will see the percentages of what the actual interest rate or your credit card is it is like in the double digits, 25 to 23 to 25% it's a lot. Now the good news with this one is that it is going to come down. Is it going to come down that drastically? No, but it's going to come down somewhat. It also does take time for credit card companies, financial institutions, banks to adjust this rate. They're not incentivized and excited to hurry up and cut your interest rates. No, because they make less money. So I know you knew that, but just in case, so paying down that high interest rate first would be the very first step and looking at that, and going back to our savings bucket, if you have savings that are access of what you need, how can you allocate to paying towards that high, high debt first? There are still opportunities for you to figure out. Maybe there is a consolidation opportunity, and I'm kind of hitting here with the credit card debts, or maybe you can do a balance transfer and get a 0% interest rate for 18 months or 12 months, or something like that. So evaluate what is your highest interest rate costing you, and what kind of adjustments you can make. You may not need to take any steps until further notice, so you start to see these things adjusting. But if you don't even know what your current credit card rate is, and all I'm suggesting is for you to look at the credit card statement, that would be a first step, because a month from now, you may be surprised to see that things have shifted, which will help you pay that debt, first

debt, pay that debt even faster. Are refinancing opportunities now, these are for big loans. And really, here we're talking about fixed rates right, like, can we find loans right that have fixed rates so that when you do refinance right, you actually fix in that rate? So look and see what opportunities are. They are the mortgage lenders. I mentioned this already. I'm going to be busy, because a lot of people have been sitting and waiting and dreaming about those days where we're used to have two and a half or 3% mortgages. We aren't going to get there today, but we need to. We need to be thinking about that as well now variable debt, and this is something to think about. So examples of variable debt would be home equity line of credits, right? Credit cards are also considered to be variable. Even though you look at the statement and they have a specific interest rate that you're paying, it still can change. So look at how that you know floats on your financial statement. And can you refinance that? Can you make that rate be fixed that way? That way you have more guarantees that it isn't going to jump the payment monthly payment for you next month. That is the other thing here to consider in the debt category would be your credit score. And so how do we this is something that all of you should be looking at once a year. All of you are obligated, not obligated, but you are entitled. That's a better word. You're entitled to receive a free credit report from three credit agency agencies so that you can compare and see if everything is is okay there. I'm not going to go into the details of how to review it and what to do, but just do know that you entitled together a report, and so when you're reviewing that credit report, how can you boost your credit score, right? So that it it helps you be positioned better when opportunities to come to, for example, refinance the mortgage, right? And you have a high, higher credit score, you all know, gives us more opportunity to qualify for better rates in the future. So some action steps you can take right now would be to focus on making sure you make your payments on time. This is one of the biggest components. When you look at the credit score, it's like, if there's in a circle, that circle consists of a lot of it's like pizza. Slices of pizza, all of these little slices contribute to the overall score payments on time. Is actually, by far, one of the ones that weighs the most, because that's how you prove to somebody that you're credit worthy, just trustworthy, responsible individual, you're paying your debts back on time. And also, if you're looking at your credit credit card utilization rate right? And credit card utilization rate is, let's say you have $10,000 credit card limit, and you're using every month 8000 of it, so you're utilizing 80% right of what's available to you, but you're paying it back. Or one month, you still have that same 10,000 credit card limit, but you're using only 5000 this gives signals, again, to this big overall credit score of how well you are using your credit card if you, if you, you know, charging it all the way to the limit and paying it back on time, writing consistently that good, but if you're charging it up to the limit and then taking time to pay it off, that starts to have negative points in your overall credit score. So you want to balance these things as much as you can. But again, overall, having a higher credit score will really benefit you into the future, if you want to take advantages of these lower rates. And again, this will all take time, but let's take inventory of everything that you have going on right now. All right. My number three category would be investments. We talked a little bit about cash, which some people consider investments, especially now when it has paid us pretty good returns, but I am thinking about more midterm to long term type of investments. It's like our investment accounts or brokerage accounts. It's every time in accounts 401 case, IRAs Ross IRAs, it's our college savings accounts for for our kids, education, those kinds of things. Now this is where we step into the area of where we're talking about actually investing in assets like stocks, it's like bonds, alternative investments and so forth. So here is a little bit of a different game. Now, what historically has happened, and the time will show stocks generally like when interest rates are being cut right, because investors tend to shift right from sitting on the cap pile of cash that's earning you 5% to now having to look for opportunities elsewhere on the market to make more money. Now, going from cash to all the way to the stock market is a very big step, and you have to be working. Willing to take a lot of risk, but that's that's the behavior, right? Because markets are driven by our behavior, investors behavior. So I just want you to kind of have that perspective, perspective. So here are a couple things that we can focus on. We want to shift our focus towards mid to longer term bonds when interest rates are falling shorter term bonds, right? And this is like one to three years tend to have less of a yield for us to consider when we shift from the short term duration. And duration is basically how long it takes for this bond. And you don't, for the most part, you don't own just one bond. You own a fund that has a lot of different bonds for how the duration is measured and how long it takes for you to realize that return. So one to three years tends to be very short and conservative. Midterm is like three to seven years, and then anything like seven years, up to 10 years or more, is considered to be long term. So you kind of want to be in this middle bucket, because now, when the rates are cut right, we're going to go and look for longer term bonds so that they can provide us more return right for the monies that we currently are getting in the short term bucket. So this is to evaluate your portfolio and see what kind of bonds do I have in my portfolio. For the clients that we generally work here at Main Street, most of the times, and especially in the last few years, we focus on the short term and midterm bonds, very few, or if, if any, still have long term bonds, because it didn't make sense, right? It the risk you would take in with longer term bonds for the same amount of yield you could have gotten in a short term bond. So things are shifting a little bit right now, or going to shift. So we just need to consider that now, if you're holding cash or short term bonds, think about the bonds that would fall into the category of like five to 10 years, so that mid to long term horizon, and of course, all of our favorite stocks, this is what gives the most juice to our portfolio. Stay the course. I mentioned this already. Stocks tend to like lower rates and because, again, people are looking to make more money with their cash. It also signifies the whole idea of cheaper debt, right? Is that companies, businesses, can borrow at lower rates, and so they can continue to expand. They can continue to grow, therefore everything else flourishes. Right? Our stocks grow in value. They pay dividends. So continue that long term strategy. We aren't jumping out of the stock market. We're staying the course, and then, of course, making sure this is like an investment section of this discussion, making sure that your allocation, stock to bond, allocation in your investment portfolio, is on target. You can look at all of these other components, but if you're not meeting your target allocation, then you're not earning the amount of return that you're expecting from the portfolio for the risk that you're taking. So for example, if your portfolio is 80% stocks and 20% bonds, and now you evaluate and you look at it, and it's like 70% stocks and 30% bonds, you're going to be earning a lot less return because you went from having 80% of your portfolio in stocks to 70% so if anything, and what you can control in all of this that we discussed, that's changing that allocation and making sure right adjusting whatever you need to adjust to Get there. Now, if you work with the financial planner, that is something that they can advise you on as well. Don't forget to review allocations inside your 401 K so IRA, so many times they see clients have cash sitting or money market holdings in their retirement accounts. You want to make sure this is invested, especially because we're talking long term

goals here for for our money. So make sure that you are focused on allocation. Review your bonds and cash positions stick out with the stocks, because we are looking here for the long term investment strategies. And last but not least, take advantage of the the buy opportunity or call by the dip opportunities. And these are, these are times on the market. And I've done this personally. I've seen clients do this professionally as well. If you see that there's a dip, right? If there's a bad day on the market, one of the sites I frequently read articles on is Wall Street Journal. So if I look into Wall Street Journal and like, right along the top, there's a line, and it gives you, you know, percentages of how each of the different markets doing. If you see the red, a lot of red and set. Guideline for yourself. What is it that considers in your mind, a dip? Is it a 1% dip? Is it a 2% dip? We've had a few of these just recently, but buy that dip, put more money in the market. It's like going to the grocery store and seeing I shop at Whole Foods frequently, and guess what, anytime I see the yellow sticker that says sale, I pay attention, right? Because that's the item that enough I buy. It frequently might be a good opportunity to buy. So that's the same thing is happening on the stock market. It's on sale, and so you have opportunity to buy more of stocks for cheaper money. So it's kind of like getting that deal. So stay informed on this as much as you can. It isn't required. It isn't necessary. If you're not interested in this kind of stuff, but if you are, and you have access cash that now needs to be repositioned somewhere, this is what I would like to propose. So my friends a couple things here before I wrap up, we need to start looking at what these lower rates will bring. I'm excited for the fact that debt is going to adjust, but it's going to take some time, but we need to be proactive with our savings. I still want you to make money on your savings. We need to have reserves in order to be able to support ourselves in case there's an emergency, or maybe we have a goal that we've been saving for, and it's just about to come up. So I don't want you to lose opportunities on those two and at the same time, I want you to continue earning money on your long term portfolio. So lots of different things for you to work in here, but if you go back to the beginning, put together that financial statement that outlines all of your assets, all of your liabilities, and you will start to see pretty clearly what are the areas and what do you need to focus on. Let me know if you have any questions, and remember, you are the bosses of your own money. You.